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WASHINGTON – The deadline for federal credit unions to decide if they want to make changes to their 457(b) deferred compensation plans is Aug. 15, the Internal Revenue Service said. The IRS notice allows any FCUs with a 457(b) plan already in place by mid-August to maintain its plan and add new employees, according to CUNA. The IRS notice makes it clear that if it eventually decides that FCUs cannot offer 457(b) plans, there will be appropriate transition rules to avoid adverse tax consequences for participants. However, the issue of whether federal credit unions can maintain the plans under the 457(b) requirements over the long haul remains unresolved under the IRS notice. The new IRS notice does not answer the question that first came to light in a private letter ruling in the spring of 2004, which told a FCU that, as a federal instrumentality, it was not eligible to establish a 457(b) plan. The letter was silent on what kind of deferred compensation plan the credit union could offer. According to CUNA’s Kathy Thompson, senior vice president of regulatory compliance, although that letter only applied to the credit union to which it was addressed, “obviously all federal credit unions became concerned about whether their plans remain eligible under the 457 rules.” Although FCUs have been offering 457(b) plans since the tax law was changed in 1986 to cover tax-exempt organizations, Thompson noted that the IRS issued regulations in 2003 that interpreted the words in the statute that excludes a “governmental unit” from offering 457 plans to exclude a “federal instrumentality” from doing so. “CUNA and CUNA Mutual have been working since last summer to resolve this problem,” Thompson said, “either by retaining the 457 coverage or by permitting eligible plans under Section 451, which were the deferred compensation programs credit unions offered before 1986.” The IRS is currently reviewing the definition of “governmental plan” under Section 414(d) of the code, and plans to evaluate how federal credit unions may, or may not, fit within those rules. Thompson said that, since several agencies have to work through the rules under Section 414, this process would unfortunately take a year or more to complete. Although this issue will not be resolved anytime soon, Thompson said the notice allows any FCU with a 457(b) plan already in place by mid-August to maintain its plan and add new employees. The IRS notice makes clear that if it eventually decides that FCUs cannot offer 457(b) plans, there will be appropriate transition rules to avoid adverse tax consequences for participants. [email protected]

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